While it’s true that expanding your business can be a good idea- most small businesses don’t have the capital they need to do so. Therefore, a business acquisition loan is often the best option. In this article, we’ll explain what you need to know about this type of business funding.
Business Acquisition Loans Explained
It is becoming increasingly common for businesses to be acquired by other businesses and by purchasing an existing business, you can benefit from the existing infrastructure and client base.
As indicated by the name, a business acquisition loan is used to acquire an existing business. You will find that these loans are available in a variety of types, some are supported by the SBA- but there are other lenders that also provide them.
How Can You Use a Business Acquisition Loan?
In order to be approved for a business acquisition loan, you must prove that you have a business plan that requires funding. You can’t just apply for funding to potentially buy a business later on.
You must decide which business you want to acquire and the approximate purchase price. This will help you determine how much you need to get the business, maintain your current business, and afford other expenses.
Over the years, business acquisition loans have become more flexible. The most common types of acquisitions are:
- Existing franchises
- Retail stores
- Restaurants
A letter of intent from the seller will increase your chances of being approved for a business acquisition loan.
Advantages/Disadvantages of a Business Acquisition Loan
The advantages of a business acquisition loan are clear- you can expand your business quicker than you would typically be able to. Additionally, if the loan is supported by the SBA, they are valuable for growing a business with little to no credit history.
The most obvious disadvantage of a business acquisition loan is that you will be required to pay interest. The terms of a business acquisition loan are usually 5 to 25 years. Typical interest rates are approximately 10%, but the underwriting process varies from one lender to another.
Qualifying for a Business Acquisition Loan
The first step in qualifying for a business acquisition loan is to choose a lender. If considering an SBA loan, you need to understand that the SB does not originate term loans but supports the commercial banks that do and cover a portion of the amount of your loan.
Next, you must get a letter of intent from the seller. While it’s possible to skip this step, without the LOI, it is much harder to get the loan. Ideally, both the business and you need to have a good credit score and good credit history. The lender is more likely to provide you with funding if you have proven that you can meet loan repayment terms and due dates.
Also, you may find it helps to provide financial documents including:
- Future projections of cash flow
- Business tax returns
- Past cash flow statements
- Personal tax returns
- Other financial documentation
What Type of Businesses Should Apply for a Business Acquisition Loan?
It is important to note that a business acquisition loan is not the best option for all small businesses. Below, we’ll list the businesses that could benefit the most from this type of loan:
- Businesses looking to buy out the competition
- Businesses that are expanding quickly and want to reinvest capital
- Businesses that want to expand into a new industry
- Businesses interested in acquiring financially troubled companies
If any of the above applies to your business, you may find that a business acquisition loan is beneficial for you.
Keep in mind though, that you are taking a risk by acquiring an existing business. If the company is less valuable than you thought, you may have a hard time repaying the loan. Therefore, it’s critical to have a business valuation done before you move forward with acquiring the business. This will help you be confident in your investment.
Due to the risks, we suggest that you take the time to ensure that you’re making the right decision. Once you are confident in your decision, research your options. In addition to a business acquisition loan, you may also want to apply for other types of funding once the purchase is complete.
Conclusion
There are lots of ways that your small business can obtain financing- but if your goal is to buy another business, a business acquisition loan is the best option. If you need help determining the best financing for you and whether or not now is a good time to buy another business, contact Rexford Commercial Capital to learn more about business financing, including business acquisition loans.
